Commentary

‘Back to school?’ Why it pays to stay home

Commentary: High costs, low wages have ended the college dream

By

DavidWeidner

SAN FRANCISCO (MarketWatch) – It’s that time of year again. Labor Day is over and school is back in session.

For as long as there’s been an education system, this time of year has always been about promise. Work hard enough. Study thoroughly enough. Push your intellect hard enough and you’ll get more than just a degree, you’ll get a future.

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College is less a promise than a gamble

While it’s true that a college education greatly increases the earning power of an individual. The financial gap between those who borrow to graduate from an institution of higher learning and those who don’t is shrinking.

That’s why when you look closely at the true cost of education for most of us, you can’t help wonder: Why bother?

Somewhere, somehow, in the last generation the path of education, particularly higher education, has disappeared under the autumn leaves. For most Americans, a college degree isn’t about a better future, it’s about indentured servitude to the lenders that profit from student loans.

Anyone who’s ever borrowed money to go to school knows what I’m talking about. There’s more than $1.1 trillion in outstanding student-loan debt, more than Americans owe on their credit cards or auto loans. And the equation is simple to as to why it will never be paid back.

College and trade schools have become so expensive (tuition is up 1,100% since 1980, according to the U.S. Bureau of Labor Statistics), pay for jobs that require college-level degrees has fallen so much (stagnant since 2000), that the chance that a graduating student will begin repaying their student loans on time within three years of graduation is slightly better than 86%, according to a 2010 study by the Department of Education.

Moreover, the three-year default rates for students who never end up getting that magical degree are staggeringly high: 18.3% for those who complete just two or three years of college and 23.1% for those who complete less than two years of private non-profit school. And those for-profit schools? About one in five will default within three years whether they graduate or not.

It wasn’t supposed to be this way. Three years ago, the federal government cut the big banks out of the student-loan business. At the end of the 2011-12 academic year, 93%, or $105 billion of the loans made were federal loans.

Just for the record, those private loans mostly are held, or are being made, by Sallie Mae, which used to be the government student-loan arm (it’s private now). Sallie Mae made a profit of more than $900 million in 2012. But the federal government has turned out to be no better than the big banks that used to do the lending. Last year, the Education Department made an estimated $51 billion on its student-loan program. And those profits should soar this year, after Congress allowed interest rates to double from 3.4% to 6.8%.

There was a lot of wrangling on Capitol Hill over the summer about those interest rates. Most notably, Democratic Sen. Elizabeth Warren of Massachusetts proposed lowering the rate charged on student loans to the overnight discount rate charged to banks, which is less than 1%. President Barack Obama proposed lowering the rate to 0.93 percentage points above the 10-year Treasury rate. Neither plan got anywhere.

Congressional leaders, mostly House Republicans, argued that rates needed to rise in order to keep servicing the loans. And they have a point. You can see how the rising default rates are going to not only eat away profit, but has the potential to saddle taxpayers with losses. A bill that capped the rates at 8.25% ended up being passed.

But you can see the problem. Interest rates aren’t the real culprit. The high cost of education and low pay that usually comes with it are. Congress and the government lenders aren’t helping matters either.

That’s why most Americans need to take a hard look at the cost benefits of borrowing to go to college. For many college graduates, student loans are an albatross that they must shoulder for a decade or more.

The real solution to the problem isn’t the expansion of loan programs. It’s slashing education costs and increasing wages for those who persevere through those four years of early classes and all-nighters.

They may be bigger issues to tackle, but they are at the core of why for most of our sons and daughters the college experience is less about the hope and promise it used to embody and more about a gamble — one that more graduates are finding themselves on the losing end.

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